Abbreviations

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1 Introduction

1.1 Subject

During their lifecycle, companies often plan to expand into a foreign market. One of the most difficult decisions they have to make beforehand, in order to do so suc- cessfully, is the choice of the mode of entry. There are many opportunities that have to be evaluated differently from case to case which can have a huge impact on the performance of the company within the new market. Franchising is a com- mon strategy for entering and growing in markets. One popular example is the fast food company McDonald’s.

1.2 Objectives

This seminar work is intended to evaluate franchising as a mode of entry. It will outline advantages and disadvantages and aims to give guidelines for companies, with regard to creating and managing a franchise system. Therefore McDonald’s will be highlighted in order to show how this can be possible.

Moreover, this seminar work will make clear in which cases franchising is not the right mode when entering into a new market. Therefore the whole topic will be considered before a more detailed discussion of the fast food sector.

1.3 Structure

The second chapter is the basis for the seminar work. Franchising will be described in general, as well as different forms of franchise systems. The third chapter be- comes more specific, as it describes possible reasons why companies work with franchise systems. Advantages and disadvantages will be outlined in order to make an initial evaluation possible. The practical aspects will be covered in chapter four. McDonald’s will be highlighted as an example of successful expansion with fran- chising. Finally, the seminar work will be summed up in chapter five. The most im- portant findings and a short prognosis for the future of McDonald’s, as well as a general conclusion will complete the work.

2 Franchising in general

Franchising was expected to have a small part in the market share when this system initially started. Acceptance for this kind of company networking grew in the course of time. In the United States the modern way of franchising became popular due to the company group McDonald’s.1

Legally franchising is defined as a collaboration of franchisee and franchiser.2 An agreed minimum duration of the contract contributes to mutual benefits for both parties. It grants security and motivates the investment of money and time in order to generate the success of the company and newly established branch offices.

A common duration period of a contract is between 5 to 10 years and often contains an option to extend.3 The interests of the franchisee are uniquely protected by specific agreements. Having a well-known established personal territory, along with the ability to protect the customer base and securing the services of fully qualified staff provides a meaningful competitive advantage.4

International contracts need to be checked carefully, because other national regula- tions may invalidate parts of the contract. Franchising is based on cooperating partners and partially shared costs. The franchisee acts as an independent entre- preneur.5

The amount of invested capital by the franchisee is based on negotiation. Financing concepts are possible alternatives which should be taken into consideration. This is often used to enable current employees to become franchisees. The system of franchising can be based on different forms and concepts.6

2.1 Concepts of franchising

Leasing, in the case of franchising, involves the acquiring of fully furnished premises which are managed independently by the entrepreneur. The costs of daily business must be paid by the franchisee and the guidelines set by the headquarters need to be strictly followed.7

This concept is dependent on high investments of the franchiser, which limits the company’s growth. When starting the business the return of invested capital is often low and running it economically is often difficult, consequently necessary investments cannot be made on time.8

With regard to this franchising concept, it has been observed that some franchisees do not identify themselves with the franchising company as much as in other con- cepts. Since they do not need to invest or develop the location, the franchisee often has no personal attachment to the location. When the franchisee decides not to follow through on the defined concept anymore, a risk for the whole company is created. Although this concept is not useful in order to increase market growth, it can be an advantage when integrated into other concepts, such as supporting a special franchisee who has worked hard and attained extraordinary achievements. In the concept of single franchising one license is given to each franchisee. Due to this method a protection of a specific interest in this area is not possible because there are usually clauses provided in such licenses enabling the franchiser to open additional units in the same area.9 The concept of multi franchising provides a li- cense enabling the franchisee to operate in specific areas, whereby the franchisee is responsible for several subsidiaries. It can be divided into many branch offices or into one main branch with subordinated units.10 When providing one master fran- chising license the franchisee may have sole rights for a defined country. This is preferable in regions with different religious and cultural backgrounds. Increased requirements to fulfill all management and financial needs are based on these dif- ferences. Often international expansion fails because of transferring concepts from one country to another without taking cultural diversities into account.11

3 Reasons for introducing a franchising system

The main advantages and synergy effect are created based on shared labor. Co- operation on networking structures offers positive effects on economic success. The transfer of knowledge, standardization and corporate identity are part of the network.12 With this in mind it can be said that some targets of the franchisee and the franchiser are the same. Others, such as agreements with regards to the amount of subsidiaries in one area sometimes differ considerably.13 Trust, based on the quality of cooperation and communication, is subjectively evaluated, but plays an important role in achieving long term economic success. There are there- fore several good reasons, as to why one should decide on specific franchise sys- tem.14

3.1 Advantages

Franchising can be seen as a permanent debt ratio characterized by a strong network. This network makes it necessary for all participants to cooperate together in order to fulfil defined targets. 15 All members are called upon to concentrate on their areas of competence and this in turn creates a synergy effect that results in the equal distribution of responsibilities. Great opportunities for market growth are offered, but it must be remembered that failure is also possible.16

Launching standards in all subsidiaries and headquarters may create a competitive advantage with regard to costs and image. For example, processing and the workflow can be optimized and coherently implemented. Transferring knowledge by standard processes can be beneficial for all companies and increase their overall know-how.17 Efficiency can only be successfully accomplished when all decisions are launched simultaneously within all respective parts of the company, thereby strengthening its market position.18